Cheap Labor Competitiveness : no longer an advantage
Vietnam has achieved continuously high growth for almost a decade by relying on natural resources and a cheap labor source. But now, it is losing those advantages.
Pressure from inflation
The advantage of cheap labor is not the only factor for multi-national cor- porations considering transfering their production abroad, but it does play an important role in their decisions.
However, cheap labor is no longer such an advantage in Vietnam, as labor costs have been increasing in recent times. According to a survey of wage trends in Asia, conducted by ECA In- ternational, wages of employees in Vietnam are expected to increase almost 12 percent this year. This is the highest growth in Asia, and nearly double the average increase across the region. In May, Vietnam raised it minimum wage by 14 percent. But due to increasing inflation, employees are not satisfied with present wage rates. Thus, strikes, especially in foreign invested enterprises, tend to be on the rise.
According to statistics from the Ministry of Labor, Invalids and Social Affairs (MOLISA), there were 603 strikes in 2008, 219 strikes in 2009, 424 strikes in 2010 and already over 220 strikes just in the first quarter of 2011 . These figures have shown that the situation has become somewhat alarming. Talking about the reasons leading to the increasing trend in strikes recently, Mr. Mai Duc Chinh, Vice president of Viet Nam General Confederation of Labor, said that present wages in enterprises, especially textile enterprises, are not satisfactory and only meet 60 percent of employees’ minimum needs. With salaries between VND1.6 million and 1.7 million per month, in the context of increasing essential commodity prices, workers’ lives are very difficult.
Sharing the same view, Ms Nguyen Thi Lan Huong, Director of the Labor and Social Studies Institute, agreed that current labor incomes are too low. “For the past few years, Vietnam has relied on cheap labor to develop its industries. This, however, is no longer to be a competitive advantage in the forthcoming years as the country should shift to a higher level”, she said.
Currently, Vietnam’s minimum wage (based on purchasing power parity) is only US$85 per month, and ranks the second lowest against other Asian economies, according to an assessment by the International Labor Organization (ILO). Vietnam’s monthly minimum wage is only just higher than Bangladesh, while the monthly minimum wage in China is US$173. However, according to Mr. Adam Sitkoff, Executive Director of AmCham in Hanoi, Vietnam cannot immediately take advantage of its cheap labor in comparison with neighboring China, even though the labor wage is half that of China. This is because the low-qualified workforce means that the cost of training is higher. Training costs are one of the biggest factors in the labor costs of enterprises. Around 60 percent of workers hired by multina- tional companies need to be retrained for periods of 6 to 12 months before they can start work, according to a report by a Dutch educational nonprofit organiza- tion. The growth rate of labor productiv ity in Vietnam is said to be lower than that of other countries in the region.
In the period 2001-2010, the growth rate of labor productivity of Vietnam was 5.13 percent, while China was 2 times that of Vietnam, Thailand 4.5 times, Malaysia 12 times and Korea 23.5 times. Thus, according to Mr. Ho Duc Hung, Director of the Research Institute for Development Economics, University of Economics of Ho Chi Minh City, enterprises can reduce part of their wage costs by hiring cheap labor. But in fact, the actual cost they spend on training new employees will be much higher. This additional labor cost in Vietnam is on average 15-20 times higher than other countries.
Negative impacts on FDI
As MPI’s Foreign Investment Department recently reported, during the first 5 months of 2011, Vietnam attracted nearly US$4.7 billion of FDI, accounting for only 23.5 percent of the annual plan, and a decrease of nearly 48 percent against the same period of 2010. The increasing trend of labor strikes demanding higher wages, especially in foreign invested enterprises, was considered one of the reasons which has had a negative impact on Vietnam’s investment environment. In a report from Haiphong’s Tan Nguong Shoes to MOLISA, the Company said it had incurred losses of US$40 million as a result of nine days of workers strikes in mid April 2011.
Meanwhile, many foreign enterprises have canceled plans to invest in Vietnam. A Japanese motor manufacturing corporation (Minebea) has chosen Cambodia instead of Vietnam to build a plant for 5000 workers. Srithai Superware PCL (SITHSI), a Thai company specializing in tableware production, has also suspended plans for a US$5 million expansion at its plant in southern Vietnam. Instead, it will set up a subsidiary in neighboring Laos. A Company representative said that, in the short term, they have little confidence in the economic situation of Vietnam. The operation of its plant has been hampered by rising production costs after wages rose twice this year.
The increase in wages for workers will undoubtedly put pressure on profits of enterprises. It will also have a negative impact on investors’ psychology. The issue could even become worse if labor instability increases, meaning that Vietnam would become an even less attractive option to investors.
Vietnam Financial Review - July 25, 2011